Many investors swear by these approaches, applying their principles rigorously. Others take a more flexible view, borrowing elements of each. But what do these strategies really mean?
Warren Buffett, widely regarded as the world’s most successful investor, once said: “All investing is value investing.” That’s because value investing is based on a simple idea: identify a company’s intrinsic value and buy its stock at a discount. This approach was pioneered by Benjamin Graham, known as the father of value investing. When a stock’s price exceeds its estimated value, value investors typically sell.
Growth investing, on the other hand, is singularly focused on increasing the value of one’s portfolio—preferably quickly. As long as their investments are gaining in value, growth investors are content. If prices fall, many will exit their positions, often using stop-loss strategies to limit potential losses.
To a growth investor, a stagnant stock is not worth holding. That’s the core distinction: while growth investors chase rising prices, value investors are more comfortable buying when prices fall—so long as fundamentals are intact.
Key differences: Value vs growth investing
At the heart of these strategies is a different philosophy around buying and selling stocks:
- Value investors buy low and sell high.
- Growth investors buy high and sell higher.
Value investors insist on a margin of safety, buying only when a stock trades below its intrinsic value. They often wait for corrections to enter at attractive valuations, typically defined by low price-to-earnings (PE) and price-to-book (PB) ratios.
Once the market re-rates the value stocks and prices rise toward or above fair value, they sell. This method has a long track record of success and is followed by many seasoned investors.
However, value investing has its challenges:
- It requires emotional discipline, especially in volatile markets.
- It demands patience, sometimes sitting on cash during bull runs if valuations are not attractive.
- It insists on strict filters, which can reduce the number of investible opportunities.
Growth investors, by contrast, are primarily focused on earnings momentum. Their key concern is whether a company can grow profitably and consistently.
They typically evaluate:
- EPS (earnings per share) growth—quarterly and annually
- Sales growth
- Industry positioning and growth relative to peers
- Forward-looking guidance and scalability
- Profit margin expansion potential
- Return on capital employed (ROCE)—ideally above the cost of capital
For growth investors, valuation is secondary to earnings potential. As long as they expect robust growth, they’re willing to pay a premium.
Because of these fundamental differences, most investors lean heavily toward one strategy. Combining both approaches can be challenging and often leads to diluted decision-making.
Which strategy is better?
There’s no universal answer. Your choice depends largely on your temperament and risk appetite.
Do you prefer buying after a correction and waiting for a re-rating? You may gravitate toward value investing.
Are you excited by companies with high growth potential, even if they trade at expensive valuations? Then growth investing may be more suited to you.
Read this | Mastering factor investing: Unlocking market secrets with value, momentum, and quality
It is possible to blend both approaches, but this demands deeper analysis and discipline—something not all investors are equipped for.
How to choose between the two?
Take your time. Study different sectors and companies. Read annual reports and track performance across market cycles. Over time, you’ll find yourself naturally aligning with one strategy.
Here are some helpful tips for beginners:
- Start with fundamentally strong companies. Review 7–10 years of financials.
- Avoid high-debt companies. Look for a debt-to-equity ratio below 1.
- Steer clear of loss-making or turnaround companies, especially in India.
- Understand the industry. If it’s too complex, skip it.
- Set an upper PE limit—ideally no more than 30–40, regardless of the strategy.
Conclusion
Both growth and value investing have their own strengths and challenges—and successfully combining them can be difficult for most investors.
The best way to choose is to try both and see which one aligns better with your natural investing temperament.
Whichever path you take, focus on building a solid understanding of the strategy, stick to it with discipline, and don’t let occasional setbacks shake your conviction—losses are part of the journey.
Also read | Value vs momentum strategy: Which works better in bull and bear markets?
As long as you invest in fundamentally strong companies, avoid overpaying, and stay patient for the long haul, you’ll be well-positioned to succeed—whether you follow value investing or growth investing.
Happy Investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
